Realising long-term value for companies and investors

On 20 May 2014, Global Compact LEAD hosted a project meeting on its Realising Long-term Value for Companies and Investors project. The meeting brought sustainability and investor relations teams together to discuss how companies might better communicate the business benefits of sustainability, and how they might mitigate the effects of investor short-termism. The meeting also saw the launch of the new PRI and Global Compact LEAD report, Coping Shifting Changing: Strategies for Managing the Impacts of Investor Short-termism on Corporate Sustainability which was developed with Rory Sullivan, an advisor to both the PRI and UNGC.

At the meeting Tomi Nummela, Senior Manager Listed Assets, PRI and Justin Atkinson, Investment Manager, Alliance Trust Investments, discussed how investors use corporate sustainability reporting data in their investment decision making. They discussed some of the initial findings from the PRI’s ongoing programme of work on long-term mandates, and described how ESG information is becoming ‘hygiene factor’ in corporate financial reporting. Corporates should feel encouraged to disclose relevant sustainability data in mainstream reporting as it can “make or break” finely balanced relative value decisions.

Three themes emerged from the discussions:

1. In order to reward the most sustainable companies in the marketplace, investors must be able to see a clear link between current or expected financial results and the integration of sustainability into business strategy and operations. That is, companies need to explicitly link their sustainability-related activities with their short and long-term financial performance, and they need to be prepared to explain exactly how these issues affect their financials not just talk about reputation or other intangible benefits.

2. Companies may assume that just because investors do not explicitly ask them about sustainability or long-term value drivers they are not interested in ESG-related issues. However, investors often have good access to corporate data through the investment value chain and sustainability-related financial analysis and often have a very good understanding of the company’s long-term strategy and value drivers. The consequence is that investors often only ask questions about these issues in their meetings with management when this crucial data is omitted from company communications – or when special ESG related circumstances emerge.

3. Companies need to invest time in developing relationships with their investors. Investors have a critical role in this process – they must be prepared to meet with companies, to discuss the company’s strategy, to provide feedback on the company’s strategy and to explain how they take account of ESG issues more generally in their investment processes. According to Nummela “the PRI’s new reporting framework reveals the enormity of corporate ESG information flowing through the investment value chain and will play an important role in making better investment decisions”.

The PRI policy and research team are currently planning a work programme aimed at shifting the focus from short-termism to longer-term horizons. For more information on the PRI’s work in this area click here.